NZD/USD: RBNZ should provide support to the kiwi – MUFG

Analysts at MUFG Bank forecast the NZD/USD pair at 0.71 by the third quarter and at 0.73 by the second quarter of next year. They see that the plans of the Reserve Bank of New Zealand to hike rates encourage a
Stronger kiwi (NZD).

Key Quotes:

“The New Zealand dollar fell only marginally in July and unlike the AUD which was the 2nd worst performing G10 currency. The economic backdrop remains favourable for New Zealand with the economy less impacted than elsewhere given New Zealand’s successful ‘zero-COVID’ policy. Real GDP has already surpassed the pre-COVID peak and inflation data for Q2 released in July was much stronger than expected. The Q/Q rate increased 1.3% versus an expected 0.7% increase. The 3.3% annual rate was the highest since 2011.”

“The RBNZ meeting, the day before the CPI data, already had enough information to announce a sudden halt to its QE program, which surprised the market. The 2-year NZ-US swap spread jumped 34bps to a level last seen in Q1 2017 when NZD/USD was trading between 0.7000-0.7300. The RBNZ in ending QE also gave clear guidance on rate hikes later this year.”

“ The OIS forward market implies two rate increases are priced by year-end. There are risks to this pricing we believe and the escalation of COVID in Australia and the forced closure of the New Zealand border to Australian entrants underlines some near-term risks that the RBNZ only delivers one of those two rate increases. Still, we are assuming higher vaccination rates and an improvement in global growth optimism will help support NZD over the forecast period through to mid-2022."